Microsoft has been purchasing new businesses at a rapid pace. In 2023, the software giant will be adding Netflix to the list of its major acquisitions.
The $2.5 billion purchase of the hit video game Minecraft was the first step. Microsoft later bought LinkedIn for $26 billion and Nuance a speech recognition and artificial intelligence developer for $20 billion. Activision Blizzard was the most prominent target with $69 billion.
Microsoft is also busy fighting U.S. trust regulators to acquire the Call of Duty creator. It has been a source of regulatory concern about market dominance, as it is now under the same roof as the Xbox gaming console. Even if Microsoft loses the video game company to competition reasons, it would still make strategic sense to own Netflix and be easier to sell in Washington or Brussels.
Both companies have a strong relationship. Netflix chose Microsoft as its advertising partner for a new ad-supported subscription service. Brad Smith, Microsoft’s President, is also a member of the Netflix board. The reason for the deal is that Microsoft wants its video game streaming services to be available on multiple devices.
Netflix has big plans for gaming. Reed Hastings, co-leading the company, bought Spry Fox, a developer, to become its sixth studio. Those ambitions would be accelerated if Microsoft became part of their empire. It is easy to imagine a bundle that includes streaming TV and games at the same time.
Microsoft’s market value is 13 times that of Netflix. As of December 1, Microsoft could afford up to a whopping $1.8 trillion. The Netflix enterprise would be worth nearly $190 billion if it was valued at a 30% premium. However, it would be difficult to find significant cost savings.
After taxing the $8 billion in operating profit, analysts expect Netflix to generate an implied return on investment of only half of its 8% weighted average capital cost in 2024.